Your
distribution network may hold the key to competitive advantage and market success.
But designing the best distribution network for your business -- one that will
maximize customer service and flexibility and minimize operating costs, capital
investment and risk, can be challenging. This step-by-step guide will help you understand
how to design a distribution network that lines up with your unique business
model and unlocks competitive advantage for your company.

Distribution
networks are receiving more of the recognition they deserve as drivers of
market success. Adapting your distribution network to changes in business
strategy and growth is a path to competitive advantage. But choosing the best
distribution network design from the myriad of options is a challenge. And making
a change to your distribution network without understanding the impact on cost
and service could result in unnecessary operating and capital investment costs
throughout a supply chain, and/or potentially decrease customer service levels.
How do you design your distribution network to maximize customer service and
flexibility and minimize operating costs, capital investment and risk?

This
article will guide you in understanding what it takes to design the right
distribution network for your company.

Step 1: Identify
Scope and Current Network Constraints

Determining
the scope of design in a distribution network strategy is crucial. One reason
is that the distribution network needs to realign with shifts in business. For
example, a change in your sales volume, customer base, requirements, geographic
markets, etc. may necessitate a change in your network strategy.

Outlining
the constraints under which the network currently operates is also important
for creating a design that provides implementable results. Some common
constraints include:

•
Distribution throughput and storage capacity

•
Expansion potential at existing sites

•
Material handling requirements for products being manufactured and distributed

•
Budgetary constraints on capital investment

•
Production line capacities

•
Remaining lease timeline and remaining life on facilities and equipment

•
WMS and WCS constraints for distributing a SKU out of multiple facilities
versus a single facility

If
you are experiencing customer service problems, you may be trying to shift your
cost versus service curve. Or perhaps you are simply trying to reduce costs.
Identifying these goals up front will drive decisions about where the
distribution network strategy may be concentrated.

In
order to align your distribution network with shifts in business or long-term
growth plans and justify the capital investment, quantifiable benefits must be
shown. While shifting the cost versus service curve is the fundamental goal of
all distribution network strategies, some of the tactics used to do so may work
against each other. For example, improving customer service levels might lead
to a decision to expand the number of facilities in a distribution network.
While this may increase operating costs, improved customer service might result
in increased revenues that would offset the increased distribution costs.

Step 3: Gather Data
on the Current Network Situation

Understanding
the current network is the most difficult and time-consuming step associated
with any distribution network strategy. When done properly, it allows informed
decision-making and confidence in the output of the modelling tools. The
saying, “garbage in, garbage out,” applies here.

Volumes
of data must be collected, analyzed and verified for accuracy. The resources
that maintain this data may be spread throughout an organization. Data that
needs to be collected and verified may include:

•
Historical facility labour and operating costs for each facility in the network

•
Historical inventory level snapshots by SKU or product category

•
Historical storage and production utilization rates

•
Current productivity measures for each facility or process being studied

•
Current throughput and storage capacities for each facility being studied

•
Transportation rate tables for any mode of transportation being used in the
network

•
Service level requirements by customer and product category

•
Growth forecast information for a planning horizon, including:

a.
SKU growth

b. Sales demand growth

c. Unit demand growth

d. Customer growth

e. Regional/local growth trends differing
from overall growth

f. Inventory growth and goals

Depending
upon the type of network design being conducted, other data may be required,
such as production line rates and capacities, retail store locations, private
fleet information, etc.

If
some of this data is not available, there are a couple of ways to bridge the
gaps. The first is to make assumptions about the required information. For
example, vendor ship-from addresses might be unavailable. However, if you know
the province or region from where the product is supplied and estimated
volumes, you might use a centrally located point in each state where product is
supplied to establish an approximation of inbound costs.

Another
approach is to conduct field tests or measurements. For example, if product
weight and dimensions are unavailable, products might be split into categories,
with a couple of representative SKUs within each category measured and weighed
to provide a basis for all of the products in a particular category. Whenever assumptions
are made about data, it is always a good idea to conduct sensitivity analyses
around that information to determine the impact on a network if the assumptions
are found to be inaccurate.

Step 4: Cleanse and
Verify the Data

Once
the data has been collected, it must be cleansed, verified for accuracy, and
formatted to work with the tools that are going to be used to model the
network. While it will be virtually impossible to ensure that every piece of
data gathered is 100% correct, here are some steps to help you determine if
there are glaring errors that might change the design recommendation:

•
Look for text entries in numerical fields and vice versa, make sure zip codes
have leading zeros, determine cause of blank fields or line items in data, and
make sure line item information is properly aligned with the correct field
designator. Do this for every data file.

•
Look for anomalies in historical databases. Examine shipments to the top 10-20%
of customers and verify that the data totals match historical totals. Do the
same for inbound shipments from top vendors.

•
Determine timing of peak demand and supply periods for top customers and
vendors and make sure that these appear accurate.

•
Examine production and distribution by SKU or product category at each facility
being studied.

•
Examine quantities of units shipped by transportation lane and mode between
facilities, to customers, and from suppliers. Look closely at specific product
categories and SKUs as well to see if their data volumes match your actual
performance.

•
Examine historical inventory information by product category and by location
for accuracy.

•
Make sure location addresses are correct for vendors and customers. If billing
addresses are inadvertently used instead of shipping addresses, a completely
different (and incorrect) set of recommendations could result.

•
Examine transportation and operating cost tables for accuracy. A slight error
in cost per unit or pound calculations can change a location recommendation or
cause misstatement of potential savings.

All
inconsistencies in the data need to be rectified with the source closest to the
data. After the data has been verified for accuracy, it must be formatted to
the specifications required by the design tool(s) you will use. Each tool has
different specifications. Depending on the modeling tools you are using and
your design requirements, you may not have to do any formatting, or you may
need several days of formatting to get the data ready for input.

Step 5: Select Design
Tools

There
are several tools that can shorten the time it takes to develop the network
design, provide greater insight into the current network situation and how
changes will impact the network, and provide better decision-making
information. Network design tools include:

•
Database analysis software and spreadsheet software: used to cleanse and verify
data and to analyze alternatives for simple networks or small segments of large
networks.

•
Mapping software: illustrates changes in network structure without relying
solely upon tables and graphs. Software that can illustrate changes in product
flow and costs from location to location within a network provides valuable
insight into the impact of “what if” type questions.

•
Transportation rating packages: used for rating thousands of shipments at once
for different transportation modes. Parcel and LTL rating packages are
particularly useful as different weights impact the cost of a shipment (unlike
truckload, rail or container shipments that operate primarily on a cost per km
or a cost per shipment basis).

•
Mileage calculation software: provides distance calculations between addresses,
zip codes, or cities. These are extremely helpful with a network realignment in
determining the impact on overall transit time and transportation cost (if lane
costs are provided on a cost per mile basis).

•
Supply chain optimization software: does an excellent job of providing the best
answer for particular time snapshots of a network, while taking into
consideration the constraints outlined in Steps 1 and 2 (minimize cost,
maximize revenue, improved customer service, etc.) There are a number of optimization
tools available at varying levels of price and complexity.

•
Dynamic supply chain simulation software: simulates the day-to-day operation of
a network. Simulation software goes a step beyond optimization software by
using randomized order profiles based on your network constraints. Network
costs, volumes, inventories, production capacity, distribution capability, and
customer service can be evaluated at a tactical level with this type of software.

Step 6: Build
Baseline Models

The
most time-consuming task in the network design process is building a baseline
model that accurately reflects the current operation and capabilities of the
distribution network. A baseline model is typically built on data from the
previous 12 months of operations. When complete, it should provide results that
match historical results within a pre-determined confidence level. This step is
actually a continuation of data verification, as any significant errors in the
data that were missed during Step 4 will show up at this time.

Once
the baseline model for the previous 12 months has been completed, it should be
run for at least the final year of the forecast planning horizon, and if
possible for several intermediate years. The purpose is to show the impact of
growth on existing operations and capabilities. This is typically the first
option you will consider, also known as the “do nothing” scenario.

Next
you want to develop an “Optimized Baseline” scenario. This is to help you
understand how your distribution network would operate under perfect conditions
with current capacity constraints – inventory is always in the right place at
the right time, cheapest transportation carrier is always available, no
unscheduled downtime in production lines or distribution centres, labour pool
optimized for the daily workload, etc. There will be lots of operating cost
savings in this scenario, but remember that this is a “perfect world” scenario
--not all of the savings can be attained in the real world. But this model is
useful in that it provides indicators of how the current network’s service and
operating cost might be improved. The results serve as the basis for comparing
potential cost reductions found in other network scenarios.

Step 7: Model
Potential Strategic Network Scenarios

When
the baseline models have been constructed and verified, you will start modeling
alternative network scenarios to understand the impact of specific changes on
operating costs, service levels and transit times. Which changes and scenarios
you evaluate will depend on your company’s unique situation, but here are some options
to consider:

•
Varying the number and location of distribution points

•
Varying the location and capacity of production lines

•
Altering the sourcing for product families, service markets, or specific
customers

After
a set of scenarios are developed and evaluated, the top 2-5 options should be
selected for further analysis. This further analysis might include:

•
determining capital investment

•
transition cost requirements

•
financial and qualitative justification

•
design recommendations for future supply chain processes

Don’t forget your
Tipping Points

Sensitivity
(or tipping point) analysis should be conducted on critical variables to
understand the impact on costs and service levels of the network. Make sure you
include tipping point analysis on assumptions made where data was unavailable.
Typical variables studied during this type of analysis include:

•
growth

•
seasonality of demand

•
freight cost

•
freight mode profile

•
wages

•
inventory levels

•
tax burden

•
facility operating costs

There
is as much art as there is science in making the correct assumptions and
verifying the data within the model on the front end of the process, then
correctly applying the results of the model on the back end of the process.
This diagram illustrates the overall modelling process:

Step 9: Determine
Capital Investment Requirements

Everything
that has been done to this point involves understanding how network changes
impact operating costs, service levels, and inventory requirements. But some
capital investment will likely be required to realize any reduction in
operating costs. The following information will provide the basis for a
budgetary capital estimate and financial justification:

•
Throughput and storage capacity requirements of each facility based upon modelling
tool outputs

•
Facility size and equipment requirements based upon those capacities

•
Inventory requirements for a new network alignment compared against existing
inventory levels. This step can be done at a high level during the network
design, or a separate initiative can be undertaken to optimize inventory levels
by SKU at each facility.

Revenues
generated from a facility sale should also be incorporated into financial
justification of the implementation
of a distribution network strategy.

Step 10: Prepare to
Justify the Recommended Network Changes

Every
company has a methodology for approving and allocating funds for capital
projects. At this point, all financial inputs should be ready for a financial
model to be created for the top network strategies identified. This step can be
an iterative one. Changes to the network structure may be necessary if
financial results do not meet acceptable levels.

You
may have to provide more than just financial justification for your proposed
network changes. There may be political implications associated with your
changes, especially if a facility function is changed or if a facility is shut
down altogether. Your company’s tolerance for risk needs to be considered as
well. Is it acceptable to have all of your inventory in one location or should
there be multiple facilities for business continuity purposes?

The
cultural impact of network changes may have to be evaluated. The ability to
consolidate operations with another division might need to be evaluated. During
the scenario development phase, these issues should be listed and considered
alongside the quantitative results of your scenarios to determine early in the
process whether any insurmountable conflicts exist.

Step 11: Recommend
and Develop Your Implementation Plan

Once
justification of the scenarios is complete, a single scenario or a couple of
scenarios may rise to the top. Two scenarios may be very similar. If one
scenario is best under certain constraints and another is best under a
different set of constraints, it may be prudent to move forward into design and
implementation with a dual recommendation and eliminate one during a future
phase of the implementation.

As
part of a recommendation, an implementation plan and timeline should be
developed in order to provide structure to the implementation process and start
involving company resources who weren’t part of the network design process.
Several questions need to be answered while developing the implementation
timeline:

•
Does a building have to be constructed, or can an existing building be used?
This can alter the timeline by several months to more than a year.

•
What systems upgrades and implementations are required? Are radical changes in
operations required? This can affect the length of time required for facility
material handling equipment design and equipment installation.

During
implementation planning, time must be set aside for site selection, facility construction
or up-fit, facility equipment design, material handling equipment installation,
systems development and installation, organizational development, hiring and
training of personnel, and inventory strategy and relocation. When compared
with existing facilities, new construction may take several additional months
until a facility is operational, so this must also be factored into your
timeline. Consider these factors as part of your overall evaluation of
different scenarios.

Summary

Your
distribution network can provide the key to unlocking competitive advantage for
your company. Following these 11 steps to network design will help you identify
the best distribution strategy for your business, minimize operating costs and
tax burden, maximize customer service, and improve flexibility to adjust to changes
in business strategy and growth.

While
this article outlines a general roadmap, much of the distribution design
process is contingent on the unique constraints of your business. Assumptions
made on missing data and/or the modeling toolset used to evaluate alternatives
can radically change how a design evolves. Pitfalls and delays can occur
without experienced professional help to navigate the process and integration
points. Before you make a change in your distribution network, make certain you
get help to understand the full impact on cost and service, or you could end up
adding operating costs and expending capital and fail to achieve the expected
returns.

Disclaimer: The information and opinions expressed in this website and the Supply Chain Update newsletter in no way constitutes professional advice and does not necessarily reflect the views and opinions of the editor and staff of Supply Chain Update or Vicenda.